Thursday, August 25, 2016, 4:34 PM

A Distinction without a Difference

On April 8,
2016, we posted a blog regarding the case of Quality Built Homes, Inc. v. Town of Carthage, ___N.C. App. ___,
766 S.E. 2d 897
(2015)(unpublished). In this case, the
Court of Appeals had held that the Town of Carthage (Town) possessed authority
to charge “impact fees” for water and sewer services.

In our April
blog post (see here)
we noted that the North Carolina Supreme Court had accepted Quality Homes case for review. In our view, Quality Homes was different from prior zoning and subdivision cases
where the North Carolina Supreme Court had affirmed the North Carolina Court of
Appeals’ decisions finding that local governments did not possess authority to
impose school impact fees. We noted that
the case involved the business of water service, an activity very different
from regulatory activities and suggested that this distinction should make a
difference. We were wrong.

On August
16, 2016, the North Carolina Supreme Court reversed the North Carolina Court of
Appeals’ decision and held that the Town did not possess authority to charge
impact fees for water and sewer services.
­Quality Homes v. Town Carthage, 2016WL 4410716 (August 19,
2016).

Quality Homes v. Town of Carthage

Facts

When a landowner
sought and obtained final approval of a subdivision plat in the town, the landowner
was required to pay water and sewer impact fees. If the landowner failed to pay these fees,
the Town refused to issue building permits.
These fees were due regardless whether this landowner ever connected to the Town’s utility systems.

The
plaintiffs were companies engaged in residential homebuilding and had paid
$123,000 in water and sewer impact fees to the Town. These homebuilders contended that the General
Assembly had not authorized the Town to charge water and sewer impact fees. These homebuilders sought a refund, interest,
reimbursement of attorney fees and
costs, monetary damages, and asserted equal protection and due process claims
against the Town.

The Town
contended that the General Assembly had authorized it to charge water and sewer
impact fees through the public enterprise statutes. These statutes authorized the Town to
establish water and sewer systems in the Town’s discretion and to charge fees for
these systems.

The Superior
Court entered summary judgment in favor of the Town and the Court of Appeals
affirmed the Superior Court. The North
Carolina Supreme Court, in its discretion, accepted the case for review.

The North Carolina Supreme Court’s
Decision

The North
Carolina Supreme Court reasoned that “[f]rom the very formation of our State
government, municipalities, in their various forms, have been considered
‘creatures of the legislative will, and are subject to its control.” p. 2. The General Assembly granted powers to
municipalities by adopting statutes and these statutes included “implied powers
essential to the exercise” of express powers granted. p. 3. The
plain language of a statute determined the extent of legislative power
conferred upon a municipality, and when the statute was clear and unambiguous,
no room for judicial construction existed.
But when the statute is ambiguous, it was construed broadly.

After
reading the public enterprise statutes, the North Carolina Supreme Court found
that these statutes empowered the Town to charge fees only “for the
contemporaneous use of its water and sewer systems.” p. 3.
Because the statute had not expressly authorized the Town to charge fees
for future use of these systems, the North Carolina Supreme Court concluded
that the Town lacked “the power to charge for prospective services.” p. 4. Accordingly, the Town’s impact fee ordinances
were unauthorized by the General Assembly and invalid.

The North
Carolina Supreme Court bolstered its conclusion by noting that (1) the statutes
enabling counties to establish and operate public enterprises included language
“to be furnished” but this language
was absent in the statutes enabling municipalities to establish and operate
public enterprises and (2) the Town could have sought local legislation to authorize
charging impact fees.

Finally, the
Court reasoned that the General Assembly had granted the Town authority “to
charge tap fees and to establish water and sewer rates to fund necessary
improvements…to its inhabitants, which [was] sufficient to address its
expansion needs.” p. 4.

The North
Carolina Supreme Court reversed the Court of Appeals and held that the Town’s
impact fee ordinances were “invalid” and remanded the case to the Court of Appeals “for consideration of
the unresolved issues.” p. 5.

Comments

1.Based upon the North Carolina Supreme Court’s
reasoning in Quality Built, the fundamental
distinction between municipal governmental/regulatory activities and
proprietary activities is irrelevant to the question as to whether a statute
authorizes charging impact fees. In
fact, the North Carolina Supreme Court never mentioned the distinction in its
decision.

2.Unlike
zoning statutes, the public enterprise statutes authorized municipalities to establish
“rents, rates, fees, charges and
penalties for the use of or the
services furnished by any public enterprise.” p. 3. (emphasis added). Although the public enterprise statutes
lacked an express limitation on charging impact fees, their broadness was
insufficient to authorize impact fees.

Quality
Built follows recent North Carolina
Supreme Court decisions that address fees typically paid by the homebuilding
industry for the impact of development on scarce public resources. In these cases, the North Carolina Supreme
Court has not found a general or local statute authorizing such impact
fees.

3.The North Carolina Supreme Court relied upon Town of Spring Hope v. Bissette, 305
N.C. 248 (1982). In Bissette, the North Carolina Supreme Court stated that a
municipality’s “rate-making function is a proprietary function rather than a
governmental one, limited only by statute or contractual agreement.” p. 250

The plaintiff in Bissette was an individual consumer of sewer services who had
complained that the rate charged by the Town of Spring Hope included charges
associated with construction of a new sewer treatment facility that was not
serving him at the time he paid these fees.
The Supreme Court, in a divided decision, rejected the consumer’s claim because
he was receiving sewer services.

The difference between Bissette and Quality Built is that the homebuilders were not
receiving utility services when the fees were due. In other words, General Assembly intended, when it selected the words “the use of
or the services furnished”, to unambiguously authorize municipalities to charge
only existing utility customers the
costs for new utility system facilities and expansions and not charge
non-customer landowners who benefit from the presence or availability of these
services. In short, the North Carolina
Supreme Court must have concluded that “the use of or the services furnished” was
unambiguous and meant only physical connection to utility systems.

4.The North Carolina Supreme Court stated that
the Town’s impact fee ordinances “on
their face exceed the powers delegated to the Town by the General
Assembly.” p. 4. (emphasis added). This
is puzzling. The public enterprise statutes do not contain an express
prohibition against charging impact fees. Four other members of the North
Carolina Judiciary - a Superior Court Judge and three judges at the North
Carolina Court of Appeals - found that the Town had authority to charge impact
fees.

The North Carolina Supreme Court remanded the
case for consideration of “unresolved issues.” The Court identified some outstanding
issues as being the Town’s defenses of statute of limitations and
estoppel. Other issues identified by the
North Carolina Supreme Court were the homebuilders’ requests that the Town pay
their attorney fees and legal costs, pay a refund of the impact fees plus
interest and pay monetary damages for violation of equal protection and due
process.